On October 21, 2022, the Cabinet Decision No. (99) of 2022 was issued regarding amending the Executive Regulations of the Federal Decree-Law No. (8) of 2017 regarding value-added tax, to reflect the amendments introduced by the Federal Decree-Law No. (18) of 2022 regarding amending Some provisions of Federal Decree-Law No. (8) of 2017, which will enter into force as of January 01, 2023.
Among the most significant amendments were those that occurred to Article No. (3) of the amended Executive Regulations. As Clause No. (2) of Article No. (3) stipulates that it is not considered a supply of services that the functions of a member of a Board of Directors are performed by a natural person appointed as Director in any government entities or private sector establishments.
In turn, the Federal Tax Authority (FTA) issued a public clarification regarding a natural person performing the functions of a member of a Board of Directors, in line with the amendments made to the aforementioned articles.
After fulfilling some conditions, the general rule was that the services provided by members of the Board of Directors, whether provided by natural or legal persons, are considered a supply of services for VAT purposes.
However, there is a radical change in this rule, which is that “the services provided by members of the board of directors will not be considered as a supply of services for VAT purposes if a natural person provides these services and that person is appointed as a member of the board of directors of any of the government entities or private sector establishments.
The above amendment applies only to board services performed by a natural person, whether resident or non-resident in the state, which was performed in an official capacity as a board member and does not include the legal person in whose name a natural person may be authorized to act as a board member, and in addition to services provided as self-employment by a natural person, a third party who is not a member of the Board of Directors during the meetings of the Board of Directors.
It is worth noting that natural persons who perform the functions of a Board member as described above must correctly specify the date of supply for their services to indicate whether the task was performed before or from January 01, 2023, to determine their Tax obligations, which its determination mainly depends on the date of supply, taking into account that these Tax obligations should not be linked to the cash flow (the date of receipt of consideration).
Below are some examples to illustrate how the date of supply is determined for the functions of a board member:
- Board member services that were performed in 2022, and the directorship fees were already known, will be subject to VAT, even if no Tax invoice is issued or any fees are received in 2022 due to the date of supply for the tasks that were performed is the date of the performance these tasks.
- For board member services whose directorship fees were agreed upon and the timing of their payment was periodic (for example, quarterly), the payments due on or after January 01, 2023,will be outside the scope of the VAT even if they are related to services performed in 2022, given that the date the supply for such services (in the case of periodic payments) is the earlier of the following dates; Issuance date of the Tax invoice; Due date of the payment; Date of receiving the payment; Or the date one year has passed since the date the service was rendered.
- Board member services that were performed in 2022, and the directorship fees would be determined after the annual meeting held in 2023, will not be subject to VAT in case no Tax invoice is issued or any advance payment is received, given that the date of supply for services performed is the date such service is performed, which will only be considered completed when determining directorship fees, even though the supply of services may have been completed earlier than the annual meeting.
Starting from January 01, 2023, only performing the functions of a board member will be excluded from calculating the registration threshold for VAT. Therefore, natural persons performing the functions of a board member should assess the need to deregister for VAT if they do not meet the mandatory registration requirements. Subject to activities other than those of a board member that qualifies as a taxable supply, for example, supplies of real estate or through sole establishments.